The IRS Whistleblower Program: Rewards, Protections and Risks

The IRS Whistleblower Program: Rewards, Protections and Risks

The IRS Whistleblower Program provides monetary awards to people who blow the whistle on tax fraud. If the IRS uses your information to recover unpaid taxes, you could be eligible for a reward of 15% to 30% of the amount collected. This program has led to billions in recovered revenue since being expanded in 2006. However, being a tax whistleblower also comes with risks and drawbacks. This article will provide an overview of the IRS Whistleblower Program, including the rewards, protections, and potential downsides.

Whistleblower Rewards

The main incentive for IRS whistleblowers is the potential for a big payout. Since the program’s expansion in 2006, the IRS Whistleblower Office has paid out over $500 million in awards^[1]. The largest single award so far was $104 million to former banker Bradley Birkenfeld in 2012 for exposing tax evasion at UBS bank^[2]. In fiscal year 2015 alone, whistleblower information helped the IRS collect $3.4 billion in taxes, paying out $103 million in rewards^[3].

To qualify for a reward, you must submit specific, credible information about tax law violations that leads to the collection of taxes, penalties, or fines. The IRS will pay awards based on the amount collected, with higher payouts for larger dollar cases:

• For cases involving more than $2 million in collected proceeds, the reward is 15% to 30%
• For cases between $200,000 and $2 million, the reward is 15%
• For cases under $200,000, the reward is 15%

The percentage awarded depends on factors like how much the whistleblower contributed to uncovering the tax issue. Cases resulting in criminal fines or civil penalties can also qualify for awards. However, if the case involves an individual taxpayer, the reward cannot exceed 15% or $10 million, whichever is less^[4].

Whistleblower Protections

In addition to monetary rewards, the IRS Whistleblower Program also offers protections from retaliation. The Tax Relief and Health Care Act of 2006 created new safeguards for tax whistleblowers, including protection from discharge, demotion, suspension, threats, and harassment^[5]. Whistleblowers are also protected from having their identity revealed without consent. The IRS is required to keep a whistleblower’s identity confidential throughout the award determination process.

However, these protections are limited in scope. Anti-retaliation protections only apply to current or former employees and contractors of the tax non-compliant organization. The law does not shield IRS whistleblowers from retaliation by new employers or other businesses. The confidentiality guarantee also only covers communication between the whistleblower and the IRS Whistleblower Office. If the case goes to trial, the whistleblower’s identity could become public through that process^[6].

Risks and Drawbacks

While rewards and protections exist, potential IRS whistleblowers should also consider the downsides:

• No guarantee of reward – A reward is never guaranteed, even if the IRS collects proceeds based on your information. The IRS may determine you did not substantially contribute to the investigation or reject your claim for other reasons.
• Long delays – It can take many years for whistleblower claims to be investigated, adjudicated, and paid out. The average claim takes 5-7 years to complete.
• Tax liability – Reward payments are considered taxable income. You may have to pay taxes on the reward amount you receive.
• Career impacts – Becoming a known whistleblower can negatively impact your reputation and career, especially if you call out a current or former employer.
• Emotional toll – The process can be stressful and emotionally taxing. You may face backlash from colleagues, employers, or the target of your whistleblowing.

The decision to become an IRS whistleblower is not easy. While rewards can be lucrative, there are also significant risks and downsides. Thoroughly research the program and consult with an attorney to understand what you may be getting into.

How the IRS Whistleblower Program Works

If you decide to proceed with an IRS whistleblower claim, here are the steps in the process:

1. Submit a Form 211 – This is the official IRS Whistleblower Submission form. You must provide specific and credible information about the tax issues, including documentation to support your claims.
2. Initial claim review – The IRS Whistleblower Office will first assess whether your claim meets the minimum requirements for further investigation. This can take 3-6 months.
3. Assignment for investigation – If approved, your case will get assigned to an IRS agent for investigation. This can take another 3-12 months.
4. Proceeds collected – If the investigation substantiates tax non-compliance, the IRS will work to recover the unpaid taxes, penalties, and interest.
5. Calculate award payment – Once proceeds are collected, the Whistleblower Office will determine if you are eligible for a reward and calculate the payment amount.
6. Pay award – You will receive the reward payment, minus applicable taxes. This can take another 1-2 years after proceeds are collected.

As you can see, the entire whistleblower process takes significant time. Most payments occur 5-7 years after the initial claim submission. You will need patience to stick through the long haul and see your reward come to fruition.

Maximizing Your Potential Award

If you decide to blow the whistle to the IRS, here are some tips to maximize your potential for receiving a sizable reward payment:

• Work with an experienced whistleblower attorney. Having legal representation increases your chances of success and getting the maximum allowable award.
• Only report solid, well-documented cases. The IRS is more likely to pursue and reward substantial, credible allegations.
• Be the first to bring the information forward. The program only pays the first whistleblower to file a claim.
• Provide specific details and documentation. The more actionable your claim, the better.
• Continue assisting the IRS investigation. Ongoing help from the whistleblower improves the chances of collecting proceeds.
• Be patient and persistent. Payouts take years, so you’ll need to stick with it.

While waiting for your claim to be processed and investigated, make sure to continue filing your own taxes accurately and on time. Any tax compliance issues from your own returns could complicate or delay your whistleblower reward.

Is Blowing the Whistle on Tax Evasion Right for You?

Becoming an IRS whistleblower is a major decision with potential for high rewards and high risks. Before filing a claim, take time to honestly assess whether it aligns with your goals and risk tolerance. Consult with a whistleblower attorney and tax advisor to get professional input. While not for everyone, in the right circumstances, blowing the whistle to the IRS can lead to financial windfalls for exposing tax fraud.